U.S. Supreme Court Rules in Favor of Arbitration Clauses and Class-Arbitration Waivers in Consumer Contracts

The United States Supreme Court's recent decision in DirecTV, Inc. v. Imburgia upheld a binding arbitration clause in a consumer service agreement that included a waiver of class arbitration. The decision reaffirms the U.S. Supreme Court's view of the supremacy of the Federal Arbitration Act and its application even in contracts nominally governed by state law.

Background

DirecTV entered into a form service agreement with two respondent California residents that included a clause committing the parties to binding arbitration. DirectTV Inc. v. Imburgia, 577 U.S. __, No. 14-462, slip op. at 1 (December 14, 2015). The arbitration clause included a waiver of the parties' right to class arbitration, as long as the "laws of your state" did not make the class-arbitration waiver unenforceable. Id. at 1-2. It further provided that if the laws of the customer's state invalidated class-arbitration waivers, then the entire arbitration clause was also unenforceable. Id.

At the time DirecTV and respondents entered into the service agreement, class-arbitration waivers were unenforceable in California based on Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). Respondents sued DirecTV, and the trial court denied DirecTV's request to submit the matter to arbitration. In so holding, the trial court cited the Discover Bank rule and found that its application to class-arbitration waivers invalidated the entire arbitration clause. Imburgia, 577 U.S. __, No. 14-462, slip op. at 2, 6-7. More than two years into the litigation, the U.S. Supreme Court issued its decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). That decision declared the supremacy of the Federal Arbitration Act and its preemption of state laws banning class-arbitration waivers.

Following the U.S. Supreme Court's decision in Concepcion, DirecTV moved to end the lawsuit and compel arbitration, arguing that the class-arbitration waiver was valid. Imburgia, 577 U.S. __, No. 14-462, slip op. at 2. The California trial court denied DirecTV's motion, and the appellate court affirmed. Id. at 4. The appellate court reasoned that while Concepcion did preempt California's Discover Bank rule, the "laws of your state" language in DirecTV's contract was ambiguous because it was unclear whether the "laws of your state" referred to the state of the law at the time the parties entered into the contract or the state of the law at the time the parties sought to invoke the class-arbitration waiver. Id. at 4-5. Because of this ambiguity, the appellate court construed the language against the drafter (here, DirecTV) and held the arbitration provision void. Id. The California Supreme Court denied discretionary review, and DirecTV petitioned for and was granted certiorari by the U.S. Supreme Court. Id. at 5.

The U.S. Supreme Court's Reasoning

The Federal Arbitration Act is clear that a "'written provision' in a contract providing for 'settle[ment] by arbitration' of 'a controversy… arising out of' that 'contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.'" Id. at 13 (citing 9 U.S.C. § 2) (Ginsburg, J., dissenting). The U.S. Supreme Court is equally clear in Imburgia that the FAA requires that arbitration contracts be treated on equal footing with other contracts. Arbitration agreements, therefore, can be invalidated only on grounds that exist for the invalidation of any contract. Openly skeptical that the California court interpreted the arbitration contract as it would any other contract, the U.S. Supreme Court set aside the California court's judgment invalidating the arbitration clause. Id. at 6.

The U.S. Supreme Court found no shortage of grounds for its decision.

First, the Court turned to the language of the contract and found that "laws of your state" is unambiguous and means valid—not invalidated—state law. Id. at 7.

Second, the Court noted that, consistent with California case law, judicial construction of a statute generally applies retroactively, and likewise would retroactively apply to contracts. Id. at 7-8.

Third, the Court found that rather than applying contract principles as they would with ordinary contracts and as required by the FAA, the California court reached its interpretation of "laws of your state" based on an arbitration context. Id. at 8.

Fourth, again, in contravention of the FAA, the Court found that the California court's language focused only on how "laws of your state" would apply in the arbitration context rather than in generally applicable terms. Id. at 9.

Fifth, the Court noted that the California Court of Appeal continued to apply invalid state arbitration law (the Discover Bank rule) as if it retained independent force even after it has been "authoritatively invalidated by this Court." Again, such application would not be accepted in other contract contexts. Id. at 10.

Sixth, and, finally, the California court failed to address whether "laws of your state" encompass invalid state laws and how such words would be interpreted in other contexts. Id. at 10-11.

These considerations, taken together, led the Court to decide that the California court had not put the DirecTV arbitration clause on equal footing with other contracts. Nor, it concluded, did the California court give due regard to federal policy favoring arbitration. Id. at 10. The California Court of Appeal's interpretation was preempted by the FAA. Id. The U.S. Supreme Court accordingly ordered the California court to enforce the arbitration agreement. Id. at 11.

Importance of the Court's Decision

The decision in Imburgia confirms the Court's prior statements on the supremacy of the Federal Arbitration Act and, more generally, federal policy favoring arbitration. Simply, arbitration clauses in contracts are enforceable, and state contract law is unlikely to undermine them. If state contract law is to defeat a contractual arbitration clause, Imburgia places the burden on courts invalidating arbitration clauses to do so in ways that are generally applicable to other contracts and that show no hostility toward arbitration.

Additionally, some commentators saw Imburgia as an opportunity for the U.S. Supreme Court to whittle away at Concepcion in light of a great deal of negative publicity surrounding private arbitration and class waivers (such as The New York Times three-part series on this subject). It was notable that Justice Breyer, who dissented in Concepcion, authored the Imburgia majority opinion, making it clear that the Court had spoken on the issue in Concepcion. Joined by Justice Kagan (another prior dissenter), Justice Breyer began the majority's analysis with a virtual lecture about the Supremacy Clause and underscored that Concepcion remains an authoritative interpretation of the Federal Arbitration Act.

In all, the Imburgia decision should provide comfort to companies using arbitration clauses and class-arbitration waivers in standard consumer contracts, even where those provisions are governed by state law.

Lawyer Contacts

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Rebekah B. Kcehowski
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Amir Q. Amiri, an associate in the San Francisco Office, assisted in the preparation of this Alert.

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